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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

Under the BCBS-IOSCO uncleared margin rules, which description of initial margin (IM) for non-centrally cleared derivatives between covered entities is correct?

Under the BCBS-IOSCO rules, initial margin is posted by both counterparties, segregated with a third-party custodian and not rehypothecated. It covers potential future exposure during close-out, so it protects the poster if the receiver defaults. Variation margin, not IM, covers current mark-to-market changes.

  1. AIt is posted by both parties, held by a third-party custodian, and not rehypothecated, so it is protected if a counterparty defaultsCorrect
  2. BIt is posted only by the party with negative exposure, and can be freely reused by the receiver
  3. CIt covers current mark-to-market changes and is exchanged daily as variation margin
  4. DIt is netted against variation margin so only one net amount is transferred

Explanation

Under the uncleared margin framework, IM is exchanged bilaterally (both parties post), covers potential future exposure during close-out, and must be segregated with a third-party custodian without rehypothecation. Variation margin covers current mark-to-market changes, and IM is not netted with VM.

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